Trusts

The popularity of the Discretionary Trust is due to the flexibility, which it can provide in relation to distributions of income and assets among family members. A typical Discretionary Trust has the following essential features:

• The Trustee who is either a company, family member or a trusted friend, is given wide discretionary powers in relation to the distribution of income and the appointment of capital among family members.
• A clause will be included in the trust deed giving the client the power to remove any trustee and to appoint a new trustee and thus giving the client indirect control.
• The trustee is given wide power to acquire or dispose of property, investments or other assets, to carry on a business and to borrow money.

A trust is not a separate legal entity (unlike a company structure) when income comes into the hands of the trustee it will incur one or both of the following fates:

• The trustee can distribute the income to the unit holders or beneficiaries and it then becomes income to them and they are subsequently taxed on income in the normal way.
• The trustee can retain the income for the trust and not distribute it to the beneficiaries. This income is taxed at the top marginal rate of tax (currently 47%). New taxation rules for Trusts are pending and this would allow you to capture income at a tax rate of 34%.

A Discretionary trust can do all of the following:

• Enable the investor to have full control and the ability to manage their family assets as they see fit.
• Provide the ability to distribute different types of income to different beneficiaries.
• Save surplus income tax by its unique income splitting ability.
• Provide a good defence for family assets against creditors.
• Helps with estate planning by easy inter generation effective transfer of assets.

By setting up this type of Trust it allows you control of where you invest your funds as well as allowing you to gear into a trust and obtain tax benefits. This is achieved, by you purchasing units in a Discretionary Unit Trust; which in turn holds all the assets. In addition, a company can be a discretionary beneficiary, thereby receiving any surplus profit at the discretion of the Trust.

In summary the benefits to your are:

• It allows you as individuals to borrow money and invest in units in the Trust, similar to your current investments. The units carry with them a minimum rate of returns a specified in the trust deed. Income can flow from the trust to you and the interest on the loan is tax deductible.
• Returns to the individual can be controlled to some extend.
• It allows for discretional distributions to other beneficiaries, where appropriate, i.e. a company structure, where maximum tax rate is 34%. The latter may not be necessary pending the passing of new legislation relating to the taxation of Trusts. Other beneficiaries can enjoy distributions and possibly be taxed at a lower tax rate.
• If other income is generated (business or personal exertion income), it may provide you with an opportunity to make contributions into a Superannuation fund.

Structure

In your case this allows you the opportunity to borrow money and claim a tax deduction now, and invest the money over a period of time.

Case Study

Mr X is employed and earns $125,000 gross per year. Mrs X is at home with the 3 kids and earns no income.

Mr X is considering purchasing an investment property for $300,000 off then plan and use his equity in his home to borrow 100% at an interest rate of 6.79% being interest only. His accountant tells him that this will help reduce his tax by negative gearing the property. Property is rented at initially at $290 per week.

If he purchases the property in his name:

If they purchased it via the Hybrid Trust:

Conclusion:

From the above you can see that the tax benefits are better and that the property goes from being negatively geared by -$20 per week in the first year to be cash flow positive of $43. In this situation the client is times better off and could consider purchasing multiple properties or maybe diversifying into other forms of investments as well.

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